Impact of Written Put Options on Diluted Earnings Per Share
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- Last Updated on 18 November, 2023
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Para 63 of Ind AS 33, Earnings per Share, states that contracts that require the entity to repurchase its own shares, such as written put options and forward purchase contracts, are reflected in the calculation of diluted earnings per share if the effect is dilutive. If these contracts are ‘in the money’ during the period (i.e. the exercise or settlement price is above the average market price for that period), the potential dilutive effect on earnings per share shall be calculated as follows:
(a) it shall be assumed that at the beginning of the period sufficient ordinary shares will be issued (at the average market price during the period) to raise proceeds to satisfy the contract;
(b) it shall be assumed that the proceeds from the issue are used to satisfy the contract (i.e. to buy back ordinary shares); and
(c) the incremental ordinary shares (the difference between the number of ordinary shares assumed issued and the number of ordinary shares received from satisfying the contract) shall be included in the calculation of diluted earnings per share.
This story will take you through the impact of the written put option on diluted earnings per share explaining the relation between the exercise price and market price.
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